QE3 Put in Place to Help the Economy Gain Momentum

After a year of speculation, the Federal Reserve finally announced its third round of quantitative easing (QE) to attempt to kick the economy back into gear.

At a press conference on Thursday afternoon, Federal Reserve Chairman Ben Bernanke explained that the Federal Open Market Committee had decided that the best way to help speed along the economy’s recovery was to launch an aggressive stimulus program.

In addition to keeping rates low, the Fed will buy $40 million of mortgages per month to support stronger economic recovery. The stock market responded well and the Dow Jones closed the day up 1.55% with the S&P 500 at its highest since December 2007.

At the press conference Bernanke explained that the Fed hasn’t set an end date in mind for QE3 because it doesn’t want to pull the program too soon. He said that the policy will remain even after the economy picks up.

The Fed isn’t going to keep the program in place until America reaches full employment (4% unemployment rate compared to the current 8.1%), because the bank wouldn’t be able to sustain those mortgage purchases for that long. Instead, the Fed will be looking to make the economy healthy enough so that it can reach full employment on its own.

There are a number of concerns revolving around monetary policy accommodations such as what the Fed has decided to do. For instance, in keeping interest rates low, people receive low returns; however, Bernanke pointed out that a weak economy means less jobs and weak investing.

“Americans will ultimately benefit most from the healthy and growing economy that low interest rates will promote,” he said.

Inflation also becomes a concern when the Fed pumps more money into the economy. However inflation is currently close to the FOMC’s goal of 2% a year, despite increases in food and gas.

According to Bernanke, QE3 will also position the country better against certain economic headwinds that can hurt the economy. In addition to international factors and impaired credit markets, the U.S. is facing $700 billion in expiring tax cuts and spending reductions at the end of 2012, known as the fiscal cliff.

Bernanke is optimistic that the fiscal cliff will be averted, but if it isn’t then the Fed doesn’t have the tools to offset the damage it would do to the economy, likely causing another recession in 2013. However, putting QE3 in place now means that should the country reach the fiscal cliff, then it would be better equipped to handle the economic shock.

“We’ve taken the steps we’ve taken now because we’d like to see the economy gain momentum,” Bernanke said.